Competitive screening of customers with non-common priors

This paper provides an explanation for the variety of contracts offered by competitive firms for seemingly identical products or services. I show that two competing firms offering menus of non-linear price schedules to customers with biased beliefs about their future demand will be able to screen these customers on the basis of their priors. Firms' use of menus of tariffs can thus be understood as screening devices for boundedly rational consumers. However, while such menus allow firms to screen their customers according to their ability to correctly forecast future demand, they do not allow them to extract additional rents provided the market is sufficiently competitive and firms' have identical priors concerning their customers' types. Sufficiently strong competition guarantees that each tariff only covers the fixed costs of the firm. Competition between firms however cannot remedy the bias in consumers' beliefs about their future demand

Higher-order uncertainty in financial markets: evidence from a consensus pricing service

We assess the ability of an information aggregation mechanism that operates in the over-the-counter market for financial derivatives to reduce valuation uncertainty among market participants. The analysis is based on a unique dataset of price estimates for S&P 500 index options that major financial institutions provide to a consensus pricing service. We consider two dimensions of uncertainty: uncertainty about fundamental asset values and strategic uncertainty about competitors' valuations. Through structural estimation, we obtain empirical measures of fundamental and strategic uncertainty that are based on market participants' posterior beliefs. We show that the main contribution of the consensus pricing service is to reduce its subscribers' uncertainty about competitors' valuations

Financial transaction taxes and the informational efficiency of financial markets: a structural estimation

We develop a new methodology to estimate the impact of a financial transaction tax (FTT) on informational efficiency, liquidity and volatility. In our sequential trading model there are price elastic noise traders and traders with private information of heterogeneous quality. We estimate the model without a tax and then quantify the elect of an FTT. In our sample, noise traders are price elastic but less so than informed traders. The introduction of an FTT changes the composition of the market, lowering informational efficiency. Even a small, 5 bps, FTT impedes correct price convergence on a sizeable percentage of days

Artificial intelligence and systemic risk

Artificial intelligence (AI) is rapidly changing how the financial system is operated, taking over core functions for both cost savings and operational efficiency reasons. AI will assist both risk managers and the financial authorities. However, it can destabilize the financial system, creating new tail risks and amplifying existing ones due to procyclicality, unknown-unknowns, the need for trust, and optimization against the system

Essays in Information Economics and Market Structure

This thesis analyses three distinct economic problems through the common lens of informational asymmetries. In each chapter we show how market behaviour is best understood as the outcome of differentially informed market participants interacting with each other within the rules specified by the respective market under consideration. Chapter 2 provides an explanation for the variety of contracts offered by competitive firms for seemingly identical products or services, e.g. in mobile communication or personal banking. We show that firms’ menu of tariffs can be understood as screening devices for consumers with mistaken beliefs about their future demand. We furthermore show that while competition between firms prevents firms from exploiting their customers’ limited cognitive ability, competition is not able to correct the inefficiency caused by customers making suboptimal choices. Chapter 3 studies the effect of a financial transaction tax on the trading of a security. We construct a market microstructure model and estimate it using intraday transaction data for a stock traded on the NYSE (Ashland Inc.). The estimates are then used to simulate how a financial transaction tax would impact volume, spreads and informational efficiency in the asset market under consideration. Chapter 4 constructs a model of observational learning with payoff externalities that provides a justification for the use of short term debt in the financing of investment projects. While financing with debt that is subject to roll over risk is often seen as a source of instability, potentially triggering investor runs on financially sound institutions, we show that it can play an important role in facilitating the revelation of privately held information about future performance of the investment

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Peer Reviewe

Europe’s proposed capital markets union: how disruptive technologies will drive investment and innovation

An EU capital markets union (CMU) has been proposed with the aim of revitalising Europe’s economy by creating efficient funding channels between providers of loanable funds and the firms best placed to use them. Jon Danielsson, Eva Micheler, Katja Neugebauer, Andreas Uthemann and Jean-Pierre Zigrand argue that a successful capital markets union would deliver investment, innovation and growth, but would rely on overcoming difficult regulatory challenges. They note that if it were successfully implemented, the proposed CMU could also change the nature of systemic risk in Europe